U.S. Rig Count 936

The number of rigs drilling
for natural gas in the United States slid by 19 this week to
936, according to a report on Friday by oil services firm Baker
Hughes in Houston.

The gas-directed rig count, which has fallen four times in
the last six weeks, hit 992 in mid-August, its highest level
since February 2009 when there were 1,018 rigs drilling for
gas.

Horizontal rigs -- the type most often used to extract oil
or gas from shale -- dropped by eight to 932, the second
straight weekly decline after hitting a record high of 943 on
Nov. 5.

Analysts estimate that two-thirds of horizontal rigs are
drilling for natural gas, and these comprise part of the
overall rig count. The rest are drilling for oil.

Graphic: link.reuters.com/sup34k

Front-month U.S. natural gas futures NGc1, which were up
about 13.5 cents in the $4.43 per mmBtu area just before the
data were released at 1 p.m. EST (1800 GMT), hit an intraday
high of $4.17 after the report.

Despite relatively low gas prices this year, gas drilling
activity has been slow to react, but recent declines,
particularly in the horizontal count may signal a shift away
from gas to more profitable oil-related projects.

Some firms have said they will shift spending away from gas
due to relatively low prices, but most analysts expect no
meaningful slowdown in gas production until the second half of
2011, at the earliest.

They said some producers may continue drilling for gas to
meet lease obligations, while others may be protected by
profitable hedges and can still produce and sell gas at prices
well above current levels.

The gas-drilling rig count is still up 271 since bottoming
at 665 on July 17, 2009, its lowest since the 640 posted on May
3, 2002.

While the gas rig count is 42 percent off its record peak
of 1,606 from September 2008, it stands 210 rigs, or 29
percent, above the same week last year.

Rising output from shale gas has been the primary driver of
increased gas production in the last few years, and most
traders agree it will be difficult to tighten the gas market
unless drilling slows sharply.

Some analysts estimate the gas rig count will have to fall
well below 850 to tighten the overall market.

Recent estimates by the U.S. Energy Information
Administration put U.S. gas output this year at more than 22
trillion cubic feet, its highest since 1973, but next year the
EIA sees output dropping 1.2 percent.

With gas inventories heading into winter at record highs
and production likely to remain strong into 2011, many traders
expect gas prices to remain cheap relative to oil, at least
until an improving economy boosts industrial demand, which
accounts for nearly 30 percent of U.S. gas consumption.
 (Reporting by Joe Silha;editing by Sofina Mirza-Reid)